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Thursday, 15 February, 2001, 15:24 GMT
The Limits of Growth?
Map of the San Francisco Bay area and Silicon Valley
Is Silicon Valley nearing the limits of growth?
By BBC News Online's Steve Schifferes in Silicon Valley

Silicon Valley has enjoyed an extraordinary burst of prosperity in the past decade.

As the high-tech sector has boomed, Santa Clara and the other counties south of San Francisco have added a quarter of a million jobs.

And with 30% of all its jobs in the high-tech sector, and a severe labour shortage, wages have doubled. The average wage in Silicon Valley is now $70,000 (45,000), more than twice the US national average.

Venture capital has flowed into the region, with 40% of all US start-up investment now concentrated in North California.

But that growth has brought its own costs. Housing costs have soared, and the average suburban house now costs $500,000. According an industry sponsored study, only 16% of middle income families can afford to buy in the area, forcing many to make long commuting journeys from outlying districts.

And with those extra journeys traffic congestion is intense, with 30% of the motorway network in the region classified as severely congested, double the percentage ten years ago.

San Jose 1973 and 1999 sateliite view showing expansion.
The boom in San Jose between 1973 and 1999

Now the rate of new company creation and job growth is slowing down. Stephen Levy, of the Center for the Study of the California Economy, believes that there may be no net job growth next year.

He says that Californians are ambiguous about whether they want growth or not, with many local communities vying to attract companies and jobs, but refusing to build the necessary housing.

The number of new housing units approved by local planning authorities in 2000 was only 5,370 - half the number of the previous year.

And he says that the fragmentation of local government units will inevitably force growth further out - with communities now 50 to 100 miles away feeling the effects of the Silicon Valley boom.

Outsourcing the work

One company has already decided that there are limits to its activities in Silicon Valley. Hewlett-Packard, the pioneering company that was the first to establish itself in the region, says it took a decision in the 1980s to decentralise its activities.

According to John Hassel, while the company wants to continue its research and development in Palo Alto, where it is the largest employer with 13,000 workers, it recognised that it was becoming too expensive to do all its business there.

Now it finds that it has to offer double their existing salary to attract skilled research workers to settle in the region - and instead has opted to create a series of regional and worldwide research centres elsewhere.

And it has taken a decision to outsource its manufacturing, with some being done in Hewlett-Packard plants overseas, notably in Singapore and Dublin, and others being produced elsewhere in the US under contract.

Mr Hassel does not believe that the energy crisis - which Hewlett-Packard was well-prepared for, with back-up capacity installed after the l989 earthquake - affected his company, but he does acknowledge that it was another blow for those companies who still carry out manufacturing in the Valley.

Hewlett-Packard was one of the first companies to occupy the Stanford Research Park across from the university, and it is the proximity to leading-edge research that still keeps some core operations in the area.

Cisco's expansion plans

Meanwhile, further south in the Valley, Cisco Systems, one of the biggest and fastest growing companies in the region has opted to expand its operations locally.

Cisco, which makes the switches and routers vital for the internet and for networking computers within companies, has decided to build a huge new headquarters in Coyote Valley, ten miles south of its sprawling operations centre in San Jose.

The new campus, which would eventually house 20,000 workers, would nearly double the company's workforce in the region, and is a significant vote of confidence in the Valley's future.

But it has run into fierce controversy, according to Mr Levy, with concerns about the environmental and housing impact leading to calls for a City-wide referendum on the issue.

Opponents say it will add to congestion and over-crowding and would mean the Valley would spreading even further into unspoiled countryside.

Cisco says it needs to be close to its competitors and suppliers, and still wants to draw on the Valley's skilled workforce. But there is no doubt that the other parts of the country - from Utah to Austin to Denver - would be happy to offer tax breaks to persuade Cisco to relocate.

The capital of innovation

Anna Lee Saxenian, who has been studying the development of Silicon Valley at the University of California, Berkeley, says she is continually surprised by its ability to adapt - and the power it has to attract workers and companies.

She says that she originally predicted that the area would reach the limits of growth ten years ago, but has realised that people are prepared to put up with more difficulties than she thought to in order to gain the economic benefits of locating in the world's high-tech centre.

And she says that the Valley is now beginning to attract more and more workers from around the world, with recruits from India, China and other Asian countries making up an increasing amount of the workforce.

She says that the fact that the big internet companies like Yahoo and eBay- who could be anywhere in the world - chose to locate in Silicon Valley - is a sign of its continuing attractiveness.

But they have changed the geography of the Valley, with many dot.coms locating near San Francisco where they have access to the creative and design community.

Mr Levy says that the key to Silicon Valley's continuing success is its ability to innovate. It is inevitable that routine manufacturing jobs will be pushed out - as the Valley has become too expensive.

But as long as it succeeds in its high-risk activities, incubating and creating new companies, and developing new products that people want, it will find a way to cope with the problems of success.

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See also:

06 Nov 00 | Business
Cisco hits the spot
15 Feb 01 | Business
Cisco freezes hiring
12 Feb 01 | Business
Silicon Valley blues
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